Iceland Jailed Bankers and Rejected Austerity—and It’s Been a Success

Instead of imposing devastating austerity measures and bailing
out its banks, Iceland let its banks go bust and focused on social welfare
policies. It has now repaid 85 percent of U.K. claims, and the Icelandic
finance minister announced recently that all will be settled by the end of the
year.

"The theory that you have to bail out banks is a theory
that you allow bankers enjoy for their own profit, their success, and then let
ordinary people bear their failure through taxes and austerity. People in
enlightened democracies are not going to accept that in the long run."
(Photo: Sveinn Joelsson/flickr/cc)

When the global economic crisis hit in 2008, Iceland suffered
terribly—perhaps more than any other country. The savings of 50,000 people were
wiped out, plunging Icelanders into debt and placing 25 percent of its
homeowners in mortgage default.

Now, less than a decade later, the nation’s economy is booming.
And this year it will become the first culturally European country that faced collapse
to beat its pre-crisis peak of economic output.

That’s because it took a different approach. Instead of imposing
devastating austerity measures and bailing out its banks, Iceland let its banks
go bust and focused on social welfare policies. In March, the International
Monetary Fund announced that the country had achieved economic recovery
“without compromising its welfare model” of universal health care and
education.

Iceland allowed those responsible for the crisis—its bankers—to
be prosecuted as criminals. Again, a sharp contrast to the United States and elsewhere
in Europe, where CEOs escaped punishment.

“Why should we have a part of our society that is not being
policed or without responsibility?” asked special prosecutor Olafur Hauksson in
the wake of the collapse. “It is dangerous that someone is too big to
investigate—it gives a sense there is a safe haven.”

By refusing to allow its currency, the krona, to suffer
ultra-low inflation to protect the assets of the rich—as in the rest of the
West—Iceland let the krona tumble. The resulting inflation and higher prices
have helped its export industries, unlike what happened in many European Union
countries, which are contending with ongoing deflation.

On Monday, Iceland’s Finance Minister Bjarni Benediktsson
announced the introduction of a 39 percent tax on creditors seeking to reclaim
assets from the country’s failed banks. As The Guardian explains, this is “an
attempt to prevent foreign investors rushing en masse to withdraw billions
currently frozen in Iceland’s financial system.”

This tax has been introduced as the country winds down capital
controls imposed in response to the crisis. Again flouting free market
orthodoxy, this move restricts Icelanders’ ability to move their money out of
the country in order to protect the krona. Initially intended to expire after
six months, the controls have been in place for more than six years.

As a result, it’s estimated that about 1,200 billion Icelandic
krona have been frozen—the equivalent of $9 billion. If capital controls were
removed, Iceland could face a spate of bankruptcies and problems with
liquidity. “There is not sufficient foreign currency to release 1,200bn [krona]
in foreign currency,” The Guardian quoted Benedikt Gíslason, an adviser to the
government, as saying. “The Icelandic economy would not survive.”

All of these actions have, unsurprisingly, drawn the ire of
other countries—in ideological and measurable ways. By refusing to honor bank
guarantees given by British and Dutch investors in Icesave—a subsidiary of one
of Iceland’s main banks, Landsbanki—Iceland created enemies of its European
neighbors. But it has now repaid 85 percent of U.K. claims, and the Icelandic
finance minister announced recently that all will be settled by the end of the
year.

When asked why Iceland was enjoying such a strong recovery while
everyone else is still mired in debt, President Olafur Ragnar Grimmson said in
2013:

“Why are the banks considered to be the holy churches of the
modern economy? Why are private banks not like airlines and telecommunication
companies and allowed to go bankrupt if they have been run in an irresponsible
way? The theory that you have to bail out banks is a theory that you allow
bankers enjoy for their own profit, their success, and then let ordinary people
bear their failure through taxes and austerity. People in enlightened
democracies are not going to accept that in the long run.”

There you have it. Instead of conceding to the crooks who made
the mess, Iceland listened to its people. And the data
speaks for itself.

Roisin Davis is an Assistant Editor at Truthdig.
Originally from Northern Ireland, Roisin is a journalist with a background in
social research and community work. After graduating from Queen’s University
Belfast, she gained an MA in Economic History from the University of Barcelona.
She currently lives in Los Angeles.

"The master class
has always declared the wars; the subject class has always fought the battles.
The master class has had all to gain and nothing to lose, while the subject
class has had nothing to gain and everything to lose--especially their
lives." Eugene Victor Debs